The Kenyan economy is facing a biting dollar shortage as the shilling dropped to a record Ksh123 against the greenback during the festive season.
The International Monetary Fund (IMF) revealed in its Country Report that Kenya is experiencing a period of tight forex demand, accompanied by reduced liquidity in the interbank foreign exchange market and a depreciation of the local currency following the war in Ukraine.
According to the fund the Kenya Shilling has depreciated against the US dollar at a faster but somewhat smoother pace than in 2021 and the economy continues to experience difficulties in sourcing US dollars in the local market.
“Liquidity in the interbank forex market has dried up and shifted to the bank-client market where forex transactions are executed at a more depreciated rate,” according to the report dated December 2022.
“Banks report delays in meeting some client orders and bilateral transactions between some non-financial corporates. Staff is closely monitoring the situation with a view to determining the main factors behind the market distortions,”
Last week, the Kenyan currency was trading at a low of Ksh123.16 against the US Currency compared to Ksh 109.86 in February last year (2021).
Tight forex demand
Following the war in Ukraine, Kenya has experienced a period of tight forex demand, accompanied by reduced liquidity in the interbank foreign exchange market and a relatively smooth depreciation of the bilateral exchange rate against the U.S. dollar
Global rating agency Fitch has downgraded the country’s capacity to meet its financial obligations amid weakening cash flow position and mounting expenditure pressures
The American rating agency said it has downgraded the country’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+’ but with a stable Outlook. The government faces a risk of borrowing from foreign lenders at a higher rate of interest thereby exacerbating the mounting debt burden estimated at Ksh8.7 trillion ($71.31 billion).
In the last fiscal year (2021/2022) the government cancelled a planned $1.1 billion Eurobond issue amid unfavourable market conditions, reflecting the global risk-off attitude toward frontier issuers.
As a result, National Treasury has revealed plans to instead raise the $900 million external commercial borrowing planned for the 2022/2023 fiscal year from international banks
So far one third ($300 million) of this amount has been contracted and the government is in the process of reviewing offers for the remainder.
Policy rate raised
Last month (November) Central bank further raised its policy rate to 8.75 per cent from 8.25 per cent as foreign reserves fell below the four months statutory threshold of import cover, signalling increasing pressure for the government to meet its foreign obligations.
Kenya’s international reserves position has fallen to $7.2 billion as of November 2022, down from $9.5 billion at the end of 2021.
“Despite IMF and other official disbursements, we forecast reserves to remain under pressure reaching $7.4 billion at end-2023. This would constitute a fall to three months of current external payments (CXP) at end-2023, down from 4.8 months of CXP at end-2021,” said Fitch
Fitch forecasts the current account deficit to grow to 5.9 per cent of GDP ($6.9 billion) in 2022 and to remain at broadly the same levels in 2023 and 2024.
Exchange rate flexibility
The agency noted that although exchange rate flexibility has helped absorb some of the external pressure, foreign-currency liquidity has tightened as a result and currency depreciation has increased Kenya’s external interest servicing in shilling terms.
According to IMF Kenya is navigating a turbulent global backdrop marked by volatile commodity prices, slowing growth in key trading partners, and constrained frontier market access to international capital markets.
Kenyan private sector firms remained cautiously optimistic about their earnings prospects this year (2022) largely due to steep increases in input costs, rising import costs due to a weaker exchange rate against the US dollar, as well as higher taxation and transport costs.
Optimism dropped sharply
The latest monthly survey by Stanbic Bank, a member of the Standard Group of South Africa shows that the degree of optimism by Kenyan firms dropped sharply in November from October’s 15-month high.
“A positive assessment of the 12-month outlook suggests that businesses expect improvement despite the expected challenging global economic environment,” said Mulalo Madula, Economist at Standard Bank.
“This has led businesses to increase purchasing activity almost as strongly as in October and build up inventories. Headcount also increased at its fastest pace since July as businesses prepare for another surge in demand.”
According to the survey, business activity increased slightly in the month of November after a marginal decrease in October mainly due to improving new order inflows and favourable weather conditions.
Source: The East African